Let’s start with a wonderfully cheery thought. Whether you rent or buy, and even if you have a completely paid-for house, you are making certain payments with cash that you will never see again. The nature of these payments can be very different: utility bills, real estate taxes, monthly rent, lawn maintenance, or private mortgage insurance. They all have one thing in common: five years from now, you have absolutely no value to show from those payments you made.
Now, unless you want to play Huckleberry Finn and hide off the grid with a sustainable generator, there isn’t really any way to get around this arrangement between the people who own land and houses and power plants and insurance companies, and the people who need electricity and heat and a place to live. It’s just a part of life.
In other words, the correct answer to how much cash we will “waste” on rent or housing costs is not zero. It’s not close to zero. But that doesn’t mean that we can’t try to minimize how much cash we are wasting every month.
The calculator model I built here compares and contrasts two helpful concepts I identified when looking at the idea of renting vs purchasing a house for our family: I called them “wasted cash” and “spent cash.”
My wife and I rented for about two years. Every single dollar that we paid during that time to our landlord, utility company, and insurance company for renter’s insurance is gone. It’s not sitting somewhere on our balance sheet as equity. It’s just gone. Tens of thousands of dollars spent and nothing to show for it.
Now, before you bail out of your rental lease and jump on a mortgage for that house that’s sitting on the corner, we need to keep going.
By the same token, when we buy a house with a mortgage, a lot of money is also wasted: whether utilities, real estate taxes, the monthly amortized interest cost, or the weed-killer cost to keep your lawn from being the only one overrun by dandelions. The only exception to this is the down-payment and principal portion of your mortgage payments, which would show up on our personal balance sheet as equity.
“Spent cash” is much more straight-forward. It’s the total amount of monthly payments we make, for everything related to housing. This includes everything above in “wasted cash,” and adds in the principal payment on the house purchase. In other words, it clarifies the simple statement: I was paying a total of X per month when renting, and now I’ll be paying a total of Y per month in a house. Or vice versa.
This number helps us understand that there are some instances where we may not want to buy a home. Maybe we are renting short term (with less spent cash per month) in order to pay down some high-interest debt. Maybe we are feeling out a new job before deciding to purchase a house in the area.
Buying a house usually feels like the more responsible money thing to do. But there are a lot of other costs that add up quickly that could make buying a house not make sense. The model helps with this type of decision too.
These descriptions, particularly “wasted cash,” sound super harsh. But they are numbers that need to be known. It doesn’t make sense to overly stretch yourself because you’re worried about “throwing away money renting” and then end up paying twice as much for utilities and being surprised by the property taxes and maintenance costs. It’s easy to get into a house and assume that the numbers will just work themselves out. They won’t. That’s what the model helps to identify.
Hints for using the calculator model:
1) People looking to buy a house for the long-term will be particularly interested in the “wasted cash” section, but should also pay attention to what their actual monthly cash payment will be. It’s probably more than you anticipated.
2) People who who are sitting in a lot of debt that they want to clear, or who are moving soon, may be interested in the “spent cash” section. Usually, especially at first, the total monthly payments while renting are less than buying. The extra cash could be used to pay down high-interest debt.
3) The Market Changes section is difficult to predict, of course, and putting an inaccurate number can really sway the numbers. Please be aware of this when doing the analysis.
4) And, for the part that I have to say, this calculator is meant to be a guide for decision-making. While I stand behind its accuracy from a pure numbers perspective, I am not liable for any loss (or gain) that may occur as a result of using it.
Every housing expense is “Wasted Cash” except the mortgage principal payment.
The whole model revolves around this concept.
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